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A. Methods of Differentiation
Rules of differentiation:
Example:
y = 10
dy/dx = 0
Example:
y = 10x2
dy/dx = (2)10x(2-1) = 20x
Example:
y = 10 x(1-1)
dy/dx = (1)10X(0) = 10
Example:
y = 20x + 10
dy/dx = (1)20x(1-1) + 0 = 20
Example:
y = (x2 – 3)(x3 + 4x + 2)
1
so to find dy/dx , we use the following formula:
If y = f(x)/g(x), then
Example:
y = x2 -4x
x2
(x2)2
(x4)
(x4)
= 4x2
x4
dy/dx = 4/x2
Exercise 1A:
a) Y = 20
2
b) Y = 6X2 + 8X + 50
d) Y = X2 + 3X + 4
X2 – 4
e) Q = 120 – 0.2P2
Example 1B:
ii) When the first derivative of a function is zero, the function is at a maximum if
the second derivative is negative, or at a minimum if the second derivative
is positive.
Example 2B:
If total revenue, TR = 200Q – 2Q2 , what is the output level that can maximize
TR?
Maximize TR = dTR = MR = 0
3
dQ
= 200 – 4Q =0
4Q = 200
Q = 50
iii. Sometimes, setting the first derivatives to zero will give two extremum values.
In order to identify which one is the optimum value, one has to substitute the
two values into the second derivative.
Example 3B:
TR = 7Q – 0.1Q2
TC = 10 + 8Q – 0.3Q2 + 0.01Q3
Profit = TR – TC
= -10 – Q + 0.2Q2 – 0.01Q3
Thus, 3Q – 10 = 0 OR Q – 10 = 0
Q = 10/3 Q = 10
4
iv. To be an optimal value, the value must fulfill both first order condition
(setting first derivative equals zero) and second order condition
(finding the second derivative.)
Exercise1B:
1. Optimize the following functions and find the value of x at the optimum
point. Then determine whether x is a minimum or maximum point.
a) y = 3x2 – 4x + 25
b) y = (3x – 2 )2
2. Given the following total revenue and total cost functions of a firm:
TR = 22Q – 0.5Q2
TC = 1/3Q3 – 8.5Q2 + 50Q + 90
determine,
a) the level of output at which the firm maximizes its total profit
b) the maximum profit that the firm could earn.
C. Partial Derivative
In the previous section, the exercises given involve differentiation of simple function
i.e. one dependent and one independent variables. However, functions are normally
in the form of multivariate functions i.e. one dependent but many independent
variables. In order to find the derivative of the multivariate function, we have to find
the partial derivative of the function.
Example:
-130 + x + 4(16x) = 0
-130 + x + 64x =0
-130 + 65x =0
65x = 130
x = 130/65
x = 2
Substitute x = 2 in z = 16x
5
z = 16x
= 16 (2)
z = 32
Exercise 1C:
a) y = 4 – x2 – 2z + xz + 2z2
determine;
ii) the value of the maximum amount of the total profit of the firm
find the value of X and Z that will maximize the function. What is the
maximum value of Y?
In many decision problems, there are constraints imposed that limit the options of choices
available to the decision makers.
Example:
TC = 3x2 + 6y2 – xy
6
Methods:
1. normal/substitution method
2. lagrangian method
Method 2 : lagrangian
Lagrangian is a process to combine the objective function and the constraint function
with a multiplier (lambda).
Steps:
(i) Objective function : TC = 3x2 + 6y2 – xy
(ii) Constraint function : x + y = 20
(iii) Rewrite the constraint function as follows:
x + y – 20 = 0
OR
20 – x – y = 0
Solution:
7
dLTC /dλ = – x – y + 20 =0 ------ (3)
[–13y – 7y + 140] = 0 ×7
– 20y – 140 = 0
Y =7 ------ (6)
x = 13 ------ (7)
λ = 71 means if output (constraint) were to increase by one unit from 20 to 21, then
the TC (obj. function) will increase by 71.
Exercise 1D: